Monday, October 14, 2013
How Bad Will The Financial Pinch Be in 2014?Tweet
Corn and soybean yields this fall are about as good as the 2012 yields were bad. Despite the challenging weather that delayed planting and then later put corn and soybeans in moisture stress, many fields are recording exceptional yields. Although two successive years should not be chosen to either determine a trend or calculate an average, the 2012 and 2013 crops are certainly representative of the long term averages. But what will happen when the other shoe drops?
If 2014 returns to an average yield, farmers could be hurting financially, particularly if they agree to higher cash rents in the coming weeks. We are in the annual farm leasing season and many landowners are going to want to see more revenue to reflect the higher value of their farmland. Farm operators who agree to that may have difficulty making the necessary cash rent payments based on expected prices and trend yields for 2014.
One only has to look at futures prices at the CME’s Board of Trade to pencil out revenue. With the 2013 production of 14 billion bushels of corn, it is easy to see that the spring guarantee for crop insurance on the 2014 crop will be about $4.50 per bushel. And although we are 6 months away from planting the 2014 crop, the market is only willing to pay about $4.80 per bushel for the crop produced next year. That will go up or down, depending on the level of production, but that has to be considered a median price given the expected 2 billion bushel surplus left from the 2013 crop.
It is easy to see the $7 and $8 corn prices from the 2012 drought are history.
But even if a drought crop occurred in 2014, the 2013 surplus will not allow prices to climb very high. In fact, University of Illinois agricultural economist Gary Schnitkey says a 125 bushel yield next year will not even generate a $400 per acre return to the operator and land, even with a $6 harvest price and a $200 crop insurance payment. According to his calculations, even a high yield crop of 220 bushels per acre will still not return more than $300 per acre to the operator and land.
His numbers are based on a $537 per acre cost for inputs, such as seed, fertilizer, chemicals, and fuel; everything but cash rent. And his concerns for the profitability of farmers for the 2013 and 2014 crops are focused on the rate of cash rent that farmers accept.
With a return to land and operator, ranging from $275 to $391 depending on yield, there is not much left for the operator’s family living cost after cash rent is paid. And in many cases, there will be insufficient crop revenue in 2014 to cover cash rents in the $350 to $450 range.
As farmers begin to pencil out budgets for 2014, one of the priorities will be what they can afford to pay for cash rent. While the Schnitkey numbers suggest that cash rents should decline if farmers want to remain in the black that may not be what the majority plans to do.
Doane Agricultural Services of St. Louis recently surveyed farm operators and found 48% have agreed to 2014 cash rents higher than what they paid in 2013. Only 14% reported that rents declined. The balance of 38% saw rent stability, despite owner desires to raise the rent in the coming year.
When competition for farmland fuels the fire in one’s belly, the result could be a serious case of financial indigestion.
Farm profitability in the coming year could be challenged with low returns to operator and land, in the wake of low commodity prices, regardless of yield. Whether yields are exceptional or drought reduced farm revenue may not be able to meet current cash rent obligations, and much less any increased rent for the 2014 crop year.
Your 2014 checklist for success:
1) Get a soil test and recommendations from the Texas Soil and Plant Lab.
2) Fill your planter with LG Seeds.
3) Call Koehl Bros. and order a new bin, because you will need it!
Posted by Stu Ellis on 10/14 at 09:31 PM | Permalink